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Government in conflict with mortgage sector

The UK government will today change the terms of its support for mortgage interest scheme for mortgage holders who have suffered job losses over the course of the recent economic downturn. The scheme will see the average mortgage interest payment reduced from 6.08% to just 3.63% for some 220,000 people who have registered for the scheme, with the government expecting the banking industry to take up the slack.

However, the reduction from 6.08% to just 3.63% means that there could well be funding issues if the banks refuse to reduce rates for those who have lost their jobs. Quite rightly, the banking industry is acutely aware that reducing the rate chargeable to those who have lost their jobs, but retained their homes, would disadvantage those who are not able to take advantage of the support for mortgage interest scheme.

The reduction in interest paid by the government was a controversial decision by the Treasury last month which many believe could literally place hundreds of thousands of people on the homeless list. The government believes that paying an interest rate of 6.08% against the average mortgage rate in the UK market of just 3.63% is not cost-effective and does not reflect the situation on the ground. If the government is backing the scheme then what are the risks to the UK banking community?

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